Looking Backwards …
LB #1
Jerome Powell has said that interest rates would be higher for longer and he has largely been true to his word. We have had over a year of rates at 5.50% on the Fed Funds rate. It is common historical knowledge that interest rate policy works with a lag, a time lag. I do something today and the effect won’t be felt for a while. It is a little different than umbrella usage. If it rained on Tuesday and on Thursday, I took out my umbrella and walked around with it open huddling underneath it, people might have me committed to the looney bin or make me president. It wouldn’t make much sense, but it does for monetary policy it does.
From Jonnelle Marte at Bloomberg,
“High interest rates haven’t stopped large corporations from borrowing as much as they ever have. Firms are taking advantage of robust demand from long-term investors, such as pension funds and insurance companies, that are seeking to lock-in some higher payouts before the Fed cuts.”
“Higher interest rates typically serve as an anchor on stocks by slowing business investment and growth. But investors have largely shrugged off those concerns. The S&P 500 has climbed about 25% since the Fed started raising rates in March 2022, adding about $3 trillion to household wealth, allowing equity prices — and Americans’ retirement accounts — to surge to new levels.”
Hans Mikkelsen, managing director of credit strategy at TD Securities. “There’s a tremendous amount of pain and many, many companies that are going bust because of the Fed’s monetary policy,” Mikkelsen said.
We have been asking who is going to buy the bonds and at what price. We have an answer. Long-term investors and at rates almost 150 basis points lower than we were at just months ago. They are buying corporate bonds and US Treasuries, just not long term. 10 years auctions and shorter are going off without a hitch, but longer dated paper is having trouble being sold. This shows that no one is certain in the bond market if they want to invest in the United States for that long.
We see the very top of the S&P 500, the magnificent 7 responsible for most of the gains in the stock market. They are all invested in AI and can do so because they are flush with cash. This would seem like a good time for a big company to buy smaller companies at low or undervalued levels. Except there is one indicator that is diametrically opposed to this logic. Warren Buffet and Berkshire Hathaway are selling Apple, Bank of America, and are sitting on 30% cash. They think everything must be overvalued and must agree with Mikkelsen that there is a tremendous amount of pain coming.
LB #2
The housing market is also feeling the effect of higher interest rates for longer. The common logic is that when interest rates come down people will step in to the housing market. The housing market and the mortgage rate isn’t linked to the Fed Funds rate but the 10-year treasury. It is right on the edge of the danger zone in the bond market. The 10-year treasury is down almost 150 basis points and yet the housing market isn’t responding.
This from Diana Olick at CNBC,
“While supply is increasing in most cities, some are seeing huge gains. Tampa, Florida’s inventory is up more than 90% compared with a year ago. San Diego is up 80%, Miami is up 72%, Seattle is up 69% and Denver is up 67%.”
“Nationwide, active listings in August were up 36% compared with the same month last year, according to a new report from Realtor.com. That was the 10th straight month of annual growth. Supply is still, however, 26% lower than in August 2019, pre-pandemic.”
“Applications for loans to buy a home are down about 4% compared with this time last year, according to the Mortgage Bankers Association. This, even though the average rate on the 30-year fixed mortgage is about 75 basis points lower now than it was then.”
All you have to do is check out Trulia or Zillow or Redfin. These are websites that list houses for sale and rent and see all the housing hot spots from 3-4 years ago are facing a huge correction. Rents are falling, house prices are being marked down, and inventories are skyrocketing. No one in Ohio is seeing much change because no one was looking to move to Ohio. If it has a mountain, a beach or a low tax rate and you have yourself a correction. As the housing prices accelerated during Covid insurance companies had to recalibrate their rates. They are doing so now and if the cost to replace a house is 40% higher then guess what, rates are going up, and the same goes for property taxes. Being a homeowner has gotten to be way more expensive.
LB #3
The problem we are facing is a simple one. The way to fix things is to cut rates. Housing becomes more affordable and businesses get relief and refinanced, and even banks experience some relief on their toxic long term debt holdings. But first we must analyze why they went up. It was to fight inflation! The inflation rate in June a year ago was 3.0% and now it is at what 2.9%? This is from Michael Mackenzie at Bloomberg, “The central bank has held rates from 5.25% to 5.5% since July 2023, and as inflation pressure moderated during the past 14 months, that policy setting has become increasingly restrictive. This trend spurred Fed officials in recent weeks to set the stage for an easing cycle to start this month.
“Inflation has now cooled to room temperature, there is really not a significant inflation problem,” David Kelly, chief global strategist at JPMorgan Asset Management, told Bloomberg Television after the CPI report was released.”
Why would the Fed lower rates now if we are still 45% above their stated goal. Their stated goal is ridiculous by the way, the goal should be stable prices or zero percent inflation, but let’s just assume they want to get back to 2 percent. The reason is because the economy is weak, and the jobs market is starting to go from max unemployment to something higher. The risk is on the fiscal side where the US government hasn’t and can’t stop spending. We are growing by around 2% currently in GDP terms and yet we are spending 7% of GDP in debt. We are financing growth and that is inflationary. If you think that is a problem long term, you aren’t alone. The bond market sees that too.
Looking Forwards…
LF#1
I should have led with this and only wrote about this considering how it has advanced over the last 3-4 days. The United States is still not allowing long range missile technology to be used against Russia despite the pleas of Ukraine’s Zelensky, the UK’s Keir Starmer, and even Canada’s Justin Trudeau. If they do, all economic talk is moot.
This from Reuters, “Canada fully supports Ukraine using long-range weaponry to “prevent and interdict Russia’s continued ability to degrade Ukrainian civilian infrastructure”, Prime Minister Justin Trudeau said on Friday.”
This from ZeroHedge
“On Friday Russia’s ambassador to the United Nations, Vassily Nebenzia, informed the UN Security council that NATO countries would “start an open war” in allowing Western long-range missiles to target Russia. “NATO would become directly involved in military action against a nuclear power. I don’t think I have to explain what consequences that would have,” Nebenzia concluded.”
This followed up Putin’s comments from the day before referring to the west using long range missiles, “This would constitute their direct participation, and this, of course, changes the very essence, the very nature of the conflict. It will mean that NATO countries, the United States and European countries, are at war with Russia.”
This has continued “Russian Ambassador to the US Anatoly Antonov on Friday added to prior Kremlin warnings, telling Rossiya 24 channel that he fears American leadership and the people are under “illusion”.
He said they seem to think that “if there is a conflict, it will not spread to the territory of the United States of America.”
Antonov continued by stressing that Americans can’t hide from nuclear war if this unthinkable happens. “I am constantly trying to convey to them one thesis that the Americans will not be able to sit it out behind the waters of this ocean. This war will affect everyone, so we constantly say – do not play with this rhetoric,” Antonov stated according to state media translation.”
This is the same Russia that has been invaded in the last few weeks, seen drones strike its capital, and are currently involved in a war on the European border. This is the same Russia that said if you try and expand NATO to the Ukraine, we will not allow it. This is not a man whose country is unfamiliar with war. This is not a man that rides camels and tends goats in the desert. This is a man with more nuclear weapons than we have. Why are we picking a fight with him again?
Russia has seen this conflict move from their attacking Ukraine to maintain a buffer from NATO to now seeing Ukraine and the west attempt to bomb the motherland itself from afar, targeting oil refineries etc. If Ukraine launches long range missiles with western technology, I think Europe and/or the United States will get touched. For the United States, that would be the first time since 1941 or if it is the mainland, the first time since 1812. Russia has the technology to do it, and there have been millions of immigrants from foreign countries that could easily be plotting to help. We need cooler heads than the UK and Canada leading this response.
LF#2
If we forget geo-politics in our investing, we might be a fair representation of the market. While the political theater was taking place last week, the markets responded like a hypersonic missile to a city was the furthest thing from their minds.
Lu Wang and Isabelle Lee write for Bloomberg,
“Time and again, Wall Street’s risk-taking brigade has turned a deaf ear to Federal Reserve policy machinations and shifting economic sentiment in the bond market. Now — with speculation rampant that Jerome Powell is about to take decisive monetary action — traders are paying attention and ushering in a new round of bulled-up wagers in favor of a soft landing. Spirits flared anew this week in tech stocks, crypto and junk bonds, with money managers emboldened by an uptick in expectations that policy makers may be poised to deliver a rare half-percentage point cut in interest rates. The reversal in the Nasdaq 100 was especially pronounced, rising almost 6% in five straight days of gains, after plunging by a similar clip the previous week.”
During 9/11 the stock market lost 14% in a week. Prepare yourself accordingly.
LF#3
I do love hypocrisy. While we are threatening to ban TikTok here in this country, Brazil bans X because Musk won’t comply with their laws, and it is a free speech catastrophe.
Reyhan Harmanci from Bloomberg writes, “After months of back and forth, Brazil finally did what it’s been threatening to do: ban X. This comes on the heels of government complaints from Britain and elsewhere about false information. Late last week, Brazil’s Supreme Court ordered X banned in the country. This could have been avoided if Musk had named a legal representative as the court had demanded. Both sides appear to be playing a high-stakes game of chicken, as the country wanted the right-wing billionaire to suspend dozens of accounts accused of spreading misinformation. The suspension is in effect, per Bloomberg reporting, “until the company agrees to block profiles with anti-democratic or criminal content, pays fines imposed so far and names a legal representative in the country.”on thriving on Elon Musk’s embattled social media platform—some of it from Musk himself. However, Brazil upped the ante, too—freezing Starlink funds in order to pay X fines. This is something people have discussed since Musk first threatened to buy Twitter (X): how his decisions at one of his companies could impact business at another. Now it’s happening.”
I found this surprising because I didn’t realize anyone was still on Twitter.
Sincerely Yours,
C Thomas Printer
The Dow Jones finished trading …at 41,393.
The 10-year Treasury bond is at …at 3.657%
The price of Brent Crude is … at $71.61 per barrel.
The price of gold is … at $2,606/oz.
The price of silver is … at $31.06/oz.
I leave you with this from the information superhighway, Aging gracefully is a nice way of saying you’re slowly looking worse.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.